5 Ways to Increase Non-Interest Income
In these days of razor thin margins, most financial institutions are turning to fee income to bolster their bottom lines. Yet data clearly indicates that service fees, including those charged by credit unions, are a key factor in driving consumers away.
Nearly half of all consumers will switch their primary financial institutions in light of new or raised fees, according to information shared during “Increasing Fee Income Without Raising Fees,” a webinar presented May 13 by Haberfeld Associates, a financial consulting firm based in Lincoln, Neb.
Sample data, assembled by BankingRates.com in January 2014, showed that 48% of consumers left a financial institution due to fees, a number more than twice the 21% who left because of a bad customer experience, the second-highest leading cause of consumer departure.
Other reasons for leaving include closure of a convenient branch (14%), uncompetitive interest rates (11%) and lack of up-to-date online features (6%).
Roughly the same percentages apply to credit unions, according to Jeff Platter, Haberfeld’s vice president and the webinar’s presenter.
“In the past two years we’ve received open and closed account data from many credit unions,” Platter said. “The only ones that were closing more accounts than they were opening had rolled out new accounts with service charges.”
Savvy credit union and, especially, branch managers understand that more member accounts help soften the burden of fixed operational costs. Serving 500 or 5,000 accounts from a branch costs roughly the same, but profitability to the branch increases exponentially.
Fee income contributes significantly to the positive part of this equation, Platter said, but only for those institutions that understand and apply it correctly.
Platter presented five ways to boost fee income without raising fees.
Read more: Encouraging opt-ins ...
Many credit unions are ineffective in selling the benefits of overdraft protection to debit card-holding members, Platter said. Regulators often accuse financial institutions of unfairly leveraging consumers through scare tactics to use the service, which can generate income for the institution. However, overdraft protection also offers consumers benefits while keeping them from being embarrassed if their card is ever refused at the point of sale, he said.
"Credit unions don't need to be deceptive or underhanded, but staff needs to be trained in ways of presenting this benefit fairly and objectively," Platter said. "When members understand how this works and the service it provides, more will opt-in, which benefits both the member and the institution."
2. Promote debit card acquisition and usage.
Data collected by Haberfeld suggests that offering a premium for increasing debit card usage has been an effective way for financial institutions to increase interchange fees over time, Platter said. Moreover, once consumers become comfortable using their debit card more frequently, those usage levels and the resulting increased interchange fee are likely to continue.
“We have several years of data that shows you can move the needle on debit card activation and usage by offering a simple, one-time cash incentive to go to the next level of usage,” Platter said. “When we have done this for our clients they get15%to20%of those receiving the offer to fulfill it, and a year later over half of them are still using the debit card at the higher level. “
Maintain member-friendly overdraft policies.
Most credit unions could use a checkup when it comes to overdraft fees, Platter said. That checkup should cover checks, recurring ACH debits or point-of-sale purchases with a debit card.
Most credit unions follow a strict policy, which sometimes can cause members embarrassment and may result in members leaving for other institutions. Member-friendly policies that are more lenient may result in slight short-term revenue declines, but will be more profitable in the long run, the consultant said.
“Our 33 years of data on this is crystal clear,” Platter said. “The more of these items you pay, the happier your members are and the more often they will overdraw.”
Fair policies designed to protect rather than penalize members, and save them from merchant-returned charges, late fees and embarrassment, will result in happier members; and, ironically, more income for the credit union, he added.
Read more: Faster is better ...
Credit unions know the sooner new members are given access to services the more likely they are to use them. Institutions that can give members quick issue of debit cards are more likely to convert those members into frequent and permanent debit card users, Platter said.
“Ourdata showsthat institutions with instant-issue have15%higher debit card activation on new accounts,20%higher swipes per new account and20%higher debit card spend per new account,” said Platter. “When it takes a week or longer for them to get a new card, there is a good chance you have lost your opportunity to onboard them.”
Attract more PFI checking accounts.
Credit unions better than other financial institutions know that becoming a member’s primary financial institution can open the door to greater product usage and deeper share-of-wallet. This is especially important at the branch level, Platter said, and most institution branches could support three times the number of accounts they currently serve. Product availability and pricing go a long way to attracting members, but PFI status is critical for keeping members and making the relationships profitable.
“When you add new accounts, you get fee income in the form of interchange and overdraft fees in chunks,” Platter said. “When you try to raise regular service charges, the incremental revenues are small and this kind of pricing inhibits your ability to attract and keep members. “
Frontlineemployee training, effective marketing and the right mix of products are all critical to attracting new members, the consultant said. Removing real and perceived barriers to becoming a member is critical to growing your PFIs, he added.
“Yes, we do still believe this includes free checking,” Platter said. “Ourdata showsthat this makes sense for community institutions.”